U.S. Housing 10% Less Affordable

Some sources are reporting that house prices are still falling. Big deal, when consumers have little left over in their weekly paychecks.

A wise man once told me that it didn’t matter what you paid for a house, but what it cost you each week from your paycheck. When making expensive purchases like a car or home, most people think in terms of their “monthly payment” not the price of the item. Rightfully so, when the aggregate cost of a 30-year mortgage is enough to make anyone faint. Housing decisions usually come down to the monthly payment.

If this is true, then the housing market is becoming less affordable, not more, every month.

While it’s a fact that homeprices have dropped from their “historic highs” of the housing bubble to “historic lows” of the longest recession in a century, the prices for everything else have not followed the same trajectory. Contrary to government figures and talking heads, the prices of ordinary goods have been rising for the last 12 months.

And people pay for ordinary goods from their ordinary weekly paychecks.

We’ve noted before how government mis-calculations in the “Consumer Price Index.” But it’s housewives, not economists, that know the real story. The cost of food, gasoline and other weekly goods is rising. Some headlines to note:

November 4: Wall Street Journal notes food prices rising for producers. Expect those prices to make their way onto supermarket shelves soon.

November 9: Wall Street Journal notes that commodity prices are soaring. This includes corn (up 39%) and soybeans (up 27%) this year. Then there’s copper, which is

November 12: ConsumerAffairs reports that gasoline prices are up nearly 21 cents nationwide in the last 12 months. That’s real price inflation of about 10% year-over-year.

We could go on, but we trust the point is clear. The cost for real goods that come out of the average paycheck has gone up, while the average paycheck has stayed the same – or fallen – nationally. According to data from the Social Security Administration, reported from Tax.com:

For those who did find work in 2009, the average wage slipped to $39,269, down $243 or 0.6 percent, compared with the previous year in 2009 dollars.

Of course, the government’s Bureau of Labor and Statistics reports a more cheery picture:

The U.S. average weekly wage was $889 in the first quarter of 2010, an increase of 0.8 percent over the previous year.

Hardly enough to keep pace with filling the tank to go to work. Assuming you’re not one of the 22% of the country that is without a job (or the 9.6% the government claims is unemployed).

Which brings us back to the housing market. Assuming you’re still employed in America, you’re still paying more and making less, on average, than a year ago. Somewhere between 1% in monetary for inflation and 10% in gasoline prices is the amount by which the ordinary consumer’s paycheck has eroded in the last 12 months. Some might argue that housing has fallen by 10% or more in some places, more than sufficient to continue enticing buyers back into the “historically low” market.

But consumers don’t make “historical” decisions when it comes to their monthly budget. They make weekly, maybe monthly decisions, especially in a long recession with tenuous job stability and weak income growth. They won’t seek to borrow more, even long term, and raise their monthly debt service, even in “fixed rate” mortgage terms. Not when the price of necessities keeps rising each week.

And inflation promises to keep those prices rising, long term.

Foreclosure sales bear witness to this phenomenon. Recent estimates put the percentage of cash investors in foreclosures around 65% with the rest going to first-time buyers (especially those stimulated with taxpayer money). Foreclosure sales needed massive drops in asset value – sometimes upwards of 60% – just to induce people sitting on productive-less cash to take the plunge. For ordinary consumers whose cash has to produce food, clothing and shelter weekly, property prices have to fall much, much more before they will get into the game.

Make no mistake about it. Housing is becoming less affordable, not more, each week. The Fed could push real interest rates below zero, and it wouldn’t help stimulate the housing market. For every point lower the average mortgage rate falls, the gains are quickly offset by more rapidly rising home energy, food and gasoline prices. And we haven’t even mentioned the “real” purchasing power of the dollar, which the Federal Reserve seems determined to utterly destroy.

This is the untold story – but big news – for anyone trying to sell a home today. Sellers need to get their price right the first time – not drop it month after month. They simply won’t be able to keep pace with the erosion of buying power amongst buyers. Likewise, their own purchasing power will fall (assuming they plan to buy another home, and not rent,which may be increasingly more sensible, but a story for another article).

I agree with your perspective. I think the most important fact that has made homes less affordable is the fact that low and middle income wages have basically stagnated since the 70’s, adjusted for inflation. That’s crazy, especially when you chart that next to the rise of housing prices.